Rates should remain steady amid bushfires, coronavirus

The ongoing bushfires and the coronavirus outbreak pose new challenges for the Australian economy, according to The Australian National University’s RBA Shadow Board. 
 
The Board believes these challenges, among others, outweigh possible signs of overall improvement for the economy – such as a drop in the unemployment rate and rising house prices. 
 
The group of ANU experts says the cash rate should remain steady in February. 
 
Their vote comes ahead of the Reserve Bank of Australia’s official announcement on Tuesday. 
 
“The Shadow Board’s conviction that the cash rate should remain at the historically low rate of 0.75 per cent is now 70 per cent – well up from last month,” Shadow Board member Dr Timo Henckel said. 
 
“The confidence in a required rate cut is 20 per cent, while the confidence in a required rate hike is just 10 per cent.” 
 
According to the Shadow Board, the global economy remains weak, and recent events like the coronavirus outbreak are likely to threaten the outlook further.  
 
“This will effect Australia as well,” Dr Henckel said.  
 
“The summer’s bushfires pose an additional challenge, with thousands of properties and businesses destroyed and residents dislocated. 
 
“The Government’s pledge to financially support the rebuilding effort and to back away from its immediate commitment to post a sizeable budget surplus could help boost demand for goods and services, depending on how the support is handed out.”  
 
Six month forecast Looking ahead six months – the estimated probability the interest rate should stay at 0.75 per cent has risen to 46 per cent. 
 
The probability given to a mid-year rate cut dropped slightly to 34 per cent, while the probability attached to the need for a rate increase is now 21 per cent. 
 
The RBA Shadow Board is a project based at the Centre for Applied Macroeconomic Analysis in the ANU Crawford School of Public Policy. 

The Board brings together some of the country’s leading experts to look at the economy and make a probabilistic call on the optimal setting of interest rates ahead of monthly RBA Board meetings. It does not try to predict RBA behaviour.